tv The David Rubenstein Show Peer to Peer Conversations Bloomberg December 25, 2016 9:30pm-10:01pm EST
>>♪ mr. buffett: i said what do i do with this money? i said, investing it is about assigning the right use for the money. i did not want to go to college. i went to omaha. i thought that was all i would need for the rest i had $175,000. i thought that was all i would need to let the rest of my life. david: did you ever run into that guy again? mr. buffett: he needs protection now. david: when you had your first
annual meeting, how many showed up at that? any advice to a young investor who would like to emulate you? >> would you fix your tie, please? david: most people would not recognize me if my tie was not fixed. let's leave it this way. all right. ♪ david: i do not consider myself a journalist. nobody else would consider myself a journalist. i began to take on a life of being an interviewer even though i have a day job of running a private equity firm. how do you define leadership? what is it that makes somebody tick? >> i appreciate it. thank you. all right. right, right. we are at your favorite gorats.ant in omaha, why do you like it so much? is it the food, the price, the combination of both?
mr. buffett: it is the food, the price, the heritage. four generations of family were involved. i have known the people over the years. the steaks are great. the prices are right. i had lunch year earlier today. it was very good. it was not that expensive, and i enjoyed it. a lot cheaper than new york and washington. david: a lot. mr. buffett: i buy people lunch here. david: you grew up in omaha, but then moved to washington when your father became a congressman. how did you start your business career in washington with various pinball machines and golf businesses? mr. buffett: i had a couple of those businesses going in, and , theest is this we had was pinball was the best. the wilson coin-operated machine company. that was named after the high school my partner and i went to. we had our machines in barbershops and the barbers wanted the machines with flippers, but those machines cost $350. whereas an obsolete machine only costs $25. we always said we would take it up with mr. wilson. this mythical mr. wilson, he was
one tough guy, i tell you. david: when you graduated from high school, you are not interested in academics? mr. buffett: i was not interested. david: your high school yearbook said you are likely to be a stockbroker even the you were not good at math. mr. buffett: i did not want to go to college, although my dad wanted me to go to college. we did not have sats then. he practically would have done the sats for me. in the truth, i always wanted to please my dad. he was a hero to me, and still is. cajoling me a controlling long and said, let's fill out an application for the hell of it. he suggested wharton, and i applied there and they let me in. after the first year, i wanted to quit and go into business. my dad said, give it one more year. so i went the second year and i said, i still want to quit. he said, well, you almost have enough credits. if you go to nebraska, which i was quite willing to do, for one year, you can get out in three years, so that is what i did. david: has wharton ever said you are a half graduate, you should
give us some money? or do they not bother you. mr. buffett: so far they haven't tried that line, but they may after they watch this. david: after that, you wanted to go to business school? mr. buffett: i won a minor scholarship in nebraska to go to any graduate school i wanted to. they would give me $500. i applied to harvard. i applied. david: you did not get in? mr. buffett: i did not get in. i spent 10 hours going to see the guy who interviewed me and , he looked at me and he said, forget it. david: have you ever run into that guy again? heard from him since? mr. buffett: no. he needs protection now. david: harvard does not come after you for money because they turned you down. you went to columbia business school. why did you go to columbia? mr. buffett: i was at the university of omaha. i was in the library in august, and i was leafing through catalogs, and happen to see the dodd as had graham and
teachers. i had read their book but had no idea they were teaching. so i wrote dean dodd and i said, i thought you guys were dead. now that i know you are alive, i would really love to come to columbia if you can get me in. david: so i assume you did well at columbia business school? mr. buffett: i did ok there. david: you worked for mr. graham? mr. buffett: it was terrific in the sense that i was working for my hero. then he was going to retire for so i wasle of years, only back there for a year and a half. but every day out was excited about being able to work for him. david: what you are good at was picking stocks, according to his formula, which was to look for companies that were undervalued, which we now call value investing. did he realize that he had some principles that were fairly unique and that is what you followed his guidance? mr. buffett: well, by the time i went to work for him i probably could have recited his books. i read his books multiple times. so it was more a question of being inspired by him than learning something from him. david: why did you come back to omaha? mr. buffett: i wanted to come
back to omaha. i had many friends in new york, but we had two kids by that time, and i lived in white plains. i take the train in. i take the train back. it did not strike me as much of a life compared to being here in omaha. both sets of grandparents were alive at that time. it just, uncles and aunts -- omaha was a more pleasant place to live. david: so you buy a house here -- mr. buffett: i rent a house. i rent a house for $175. david: ok, and when did you buy the house you are still in. mr. buffett: 1958. when my third child was on the way. david: how did you raise money? mr. buffett: well, david, actually when i came back i had , about $175,000. i thought that was all that i would need to live the rest of my life to take it of everything. i planned on going to school, thought about law school. david: think about how successful you could have been as a lawyer. mr. buffett: that is true. i know, i have regretted it ever since. david: how much money did you
cobble together? mr. buffett: we met one night early in may of 1956 and there were seven people there, aside from myself. and they put in $105,000 and i put in $100, so we started with that amount and i gave them a little piece of paper called the ground rules. david: but ultimately you into partnership? ended that partnership? mr. buffett: between may of 1956 and january 1, 1962 i started 10 more partnerships. i made a mistake. i had no secretary or accountant. i kept of 11 sets of books, filed a 11 tax returns, and i did it all myself. i was worried, it was other people's money. so i would go down to the bank. finally, i got wise and on january 1, 1962, i put all 11 of
the previous partnerships together and ran that until the end of 1969, at which time i dissolved it. david: you dissolved that one. in 1969, you started a new partnership? mr. buffett: no, by that time we had $105 million in the partnership, and about $70 million or so of that was in cash to be distributed, and the balance was in three stocks. mostly berkshire hathaway that i distributed it pro rata to everybody. david: ok. and then you started buying stocks through berkshire hathaway? mr. buffett: stocks and businesses. yeah. david: what would you say was your reason to do this? was it that you study the companies more than anybody else, you are smarter than other people, people were just caught up with fads and you did not get caught up in fads? what is your reason for success? mr. buffett: we bought businesses that we thought were decent businesses at sensible prices and we had good people to run them, but we also bought marketable securities in berkshire.
david: over the years, you bought a number of companies and had steaks and a number of companies. one of them i know about was the "washington post." how did that come about? mr. buffett: in 1973, the washington post company had gone public in 1971, about the time of the pentagon papers. but in 1973, the nixon administration through a pal of nixon's, they were challenging the licenses of two of the florida television stations that the post owned. so the stock went from 37 down to 16. now at 16, there were about 5
outstanding, so the whole washington post company was selling for $80 and no debt to speak of. so the washington post company, intrinsically worth $400 million or $500 million was selling for $80 million in the market. we bought most of our stock at about the equivalent of $100 million in the market. it was ridiculous. you had a business that unquestionably was worth four or five times what it was selling for, and mr. nixon was not going to put them out of business. david: when you are doing these analyses, then and now, do you have computers that help you? how did you actually read all materials to read about the washington post, and how do you do it today? mr. buffett: pretty much the same way, except there are fewer opportunities now. i met bob woodward and he came up with all the presidents men. all of a sudden, at 30 years of age, he was getting quite wealthy.
we had breakfast or lunch over at the madison hotel and he said, what do i do with the money? i said investing is just about assigning yourself the right story. i said, imagine if ben bradley said to you, what is the washington post company worth? what would you do if you have to write this story in a month? you would go out and interview tv brokers and assign value to each asset. i said, that is what i do, i assign myself the right story. it is nothing more than that. now, there are some stories i cannot write. if you asked me to write a story on what is some glamorous, nonprofit business worth i do , not know how to write the story. but if you ask me to write a story about what is potomac electric power is worth, i can write the story. that is what i am doing every day. i am assigning myself a story, and then i go out. david: so you get the annual reports and read them the way some people might read novels, and you do the calculations for how things are worth in your head? or do you have computers that help you? mr. buffett: if you need to
carry out something to four decimal places, forget it. i use it to play bridge. and i use it to research, a lot. david: so there is a computer in your office? i do not have one in the office, t i do at home. david: for your smart phone, can someone get a hold of you on a smart phone or mobile telephone? mr. buffett: no, a smart phone is too smart for me. david: and a computer, you use rarely? mr. buffett: one of the trick questions that bill gates and i get is who is on the computer more, excluding e-mail. and the answer is i probably am. i spend 12 hours a week playing bridge on it. i use it for research. david: anonymous people on bridge? mr. buffett: i go by the name of t-bone. and there is a woman i play with a woman in san francisco who goes by the name of sirloin. she is a two time world champ and i am eight two time world chump. we have been playing together for decades. david: are you at a world-class
level after all these years? mr. buffett: no. i, she, you could not have a better teacher than she is, but the student has limitations. david: you mentioned bill gates, how did you actually come to know bill gates? mr. buffett: it came out because meg greenfield, the editor of the editorial page of the post called me in the late 1980's and she said "warren, i have always , loved the pacific northwest, but i want to know if i would have enough money to purchase a house, a vacation-type house near seattle." i said, "meg, anybody who asks me if they have enough money, does have enough money." so she bought the house and she invited me and others to the house, and she knew the elder gates. she called mary gates. then mary went to work on bill to try to get him to come. he did not want to come to meet a stockbroker. but mary was a very firm type. finally they started negotiating hours, and she said for hours,
ur hours, and he said one hour. when we met, we talked for about 11 hours straight without being interrupted. david: so that was the beginning of the relationship. mr. buffett: yeah, we hit it off. david: but you never bought any shares? mr. buffett: i bought 100 shares just to keep track of what this young kid was doing. david: and he is now on your board? mr. buffett: that'correct. david: the relationship has become very close and you get involved with him on philanthropic things as well. mr. buffett: we have a lot of fun talking. david: let me ask about the philanthropic things you have done with bill and melinda. how did the idea of giving your money to somebody else's foundation come to you? mr. buffett: i originally had planned that my first wife would handle the disposition of, well, everything we had. we came to that conclusion in when we were in our 20's. we started the buffett foundation over 50 years ago. but i did not give away a lot of money during those intermediate
years because i thought it was compounding at a rate that i could give away billions instead of millions if i waited a little while. she died in 2004, so that plan disappeared. then i was faced with the question of, how do i give away this money in a way that goes to the people i want without me doing all the work? david: so you called bill or melinda one day and said, guess what, i am going to give away the bulk of my fortune? mr. buffett: it was not as elegant as that. at some point i did call them up. it was done over the phone. david: you did not ask them to call it the bill and melinda gates and warren buffett foundation? you did not want your name on it? mr. buffett: i did not think that would do any good. david: you were on the board? board of the bill and melinda gates foundation now? mr. buffett: true, but they run it. david: what are the highlights of some of the deals you are most proud of? the biggest deal you have ever done was precision castparts,
$37 billion. mr. buffett: yes. it was between $32 billion and $33 billion of cash, and we assumed $4 billion of debt. billion, to spend $37 you spent a year studying the company? mr. buffett: no. david: how much time did you spend with the ceo? mr. buffett: i met the ceo on july 1 last year. he happened to be calling on certain shareholders. and one of the fellows in our office at a position in the stock for some time. so it was an accident i met him. if i had been out playing golf, it never would have happened. but i went in. i like them. i heard him talk for 30 minutes. i sent to the fellow in our office and tell him that i will call tomorrow. if you would like to receive a cash bid from berkshire hathaway, we would supply one. and if not, forget we ever called. david: do you ever hire investment bankers to help you analyze a company? mr. buffett: not to help analyze the company.
sometimes they are involved in the deal. we are perfectly willing to pay a fat commission. david: one time you told me about a story how an investment banker was hired by somebody you were going to try to buy. mr. buffett: i said we would pay $35 a share for the company, then american energy, and they hired an investment banker. the investment banker came out and spent about a week. they sent a big bill at the end and they said you have to increase your price to make us look good. i said, i am not worried about whether you look good. so they hang around for a week, and finally they called up and pleaded and said can't you , increase your price somewhat a bill andcan send get paid appropriately for our non-services? i said, ok, you can tell them that we will pay $35.05, and you can say that you got the last nickel out of me. david: do you ever do unfriendly deals? mr. buffett: no. no. berkshire hathaway was originally an unfriendly deal.
but no, we are just not interested. not that unfriendly deals are necessarily bad. there are managements that should be replaced. david: people must call you every day and say, i have a deal for you. it is perfect. how often do any of these deals pan out? mr. buffett: they do not call every day. we have made our criteria fairly clear. so there are relatively few who call. when somebody calls, i can usually tell within two or three minutes whether a deal is likely to happen or not. there are just half a dozen filters, and it either makes it through the filters or it does not. david: one time i was told you got a letter from somebody from to take a look at our company. what are the odds that they would send you the prospect over the transom and you say you will buy it? you did buy it. mr. buffett: we bought 80% of and we laterlion, bought the remaining 20%. david: before you bought it, did you go to israel to look at the company?
mr. buffett: no, i hope it is there. david: and you are happy with what you bought. mr. buffett: absolutely. david: and you bought a railroad. what was the theory behind that? people think of them as fossils. mr. buffett: the railroad business had a bad century. they are kind of like the chicago cubs. everybody has a bad century now and then. but finally, the railroad industry got modernized and it is a good business. the railroad business is a good business. it is not a great business but , it is a good business. in the fall of 2009, we already owned a fair amount of bnsf, northern santa fe. and the price looked like we could do it at a sensible price. so that was a thursday. and on friday i said we would pay $100 per share if the directors were interested. he checked with the directors over the weekend and the following sunday we had a contract signed. mr. buffett: somebody from the white house calls and says, would you mind having a tax named after you? i said, if all this diseases have been taken, i will take a tax. ♪
since 1776 and enjoyed what happened subsequently. david: but we were having growth in theless last two years. do think it is ever possible to grow 5% in this economy? mr. buffett: there will be some years. but 2% growth, if you have less than 1% population growth, means in one generation, 25 years, we will add maybe $18,000 for or $19,000 of gdp per capita, so we are just beginning. 1%, my life has been a product of compound interest. maybe it is better at higher rates, but if you have an already prosperous economy, and we have the most prosperous economy the world has ever seen, and you keep compounding it, over time, people will be living far better 20 years from now than they are now. david: you have said that secretary pays a higher tax rate than you do. mr. buffett: accounting payroll
counting payroll taxes, yes. david: you favor changing that? mr. buffett: some years ago, somebody from the white house, not the president, called to say that they had read my views on taxation, and said, would you mind having a tax named after you? if all the diseases have been taken, i will take a tax, and so they refer to this. i really do feel anybody with making millions of dollars a year should have a combined payroll and income tax that is at least 30%. and in my office, everybody in the office does have that, except me. david: how did you become a democrat when your father was a big republican and you live in a conservative state? how do you think that evolved. ? mr. buffett: civil rights more than anything else. i do not think about it when i was 12 years old or 14 years old. there was a school for blacks a few hundred yards away, it never
dawned on me how different life was for other people. then i got to see more of the world and i noticed there were a lot of things unfair and the democrats seemed to be doing a little more about it. david: in berkshire hathaway today, you have an annual meeting that attracts roughly 40,000 people. mr. buffett: correct. david: when you had your first annual meeting, how many people showed up at that? mr. buffett: we had 12, but you had to count my aunt and uncle, and a couple of managers. we usually had about two outsiders. when you started berkshire hathaway, did you ever in your wildest imagination think you could build a company that would become one of the biggest in the world? was that ever in your plans? mr. buffett: no. i have always just put one foot in front of the other. david: what is it that you would like to have as your legacy? mr. buffett: i would like to be the oldest man that ever lived. no, i like teaching. if i have been a decent teacher, and i have a lot of university students come out every year. david: and today, is there anything on your bucket list you would like to do that you have not done?
mr. buffett: i would have done it. if there is anything i wt do, i do it. money has no utility to me. time has utility to me. but money in terms of making more trips are having more houses or having a boat or whatever has no utility to me whatsoever. david: what motivates you to run a company when most people your age are playing shuffleboard or they are relaxing or doing something? mr. buffett: they spend all week planning their haircut usually. i get to do every day doing what i love with people that i love. it does not get any better than that. david: so the greatest pleasure in your life other than doing interviews like this is what? looking at new companies? giving away money? what gives you the most pleasure? your grandchildren? mr. buffett: all of the above. the truth is i regard berkshire hathaway the way a painter regards to painting. the difference being that the canvas is unlimited. there is no finish line at berkshire.
it is a game that you can continue to play. david: any words of advice to a young investor that would like to emulate you? what would you recommend they do to build something close to what you have done? mr. buffett: i think you should look for the job you would want to hold if you did not need a job. you're probably only going to live once. shirley maclaine may differ with that, or a few people, but you do not want to go sleepwalking through life. whether you make x or 120% of x, it really isn't remotely as important as to whether in most cases you marry the right person or find something you would do if you did not need the money. i have had that job for 50 or more years. i was lucky in that i sort of found early on what turned me on that way, but don't settle for something. don't worry about making the most money this week or next month. when i offered to work for ben graham, i said i would work for nothing, and i meant it.